Microsoft yesterday launched an audacious $44.6bn (£22.4bn) bid for internet rival Yahoo in an attempt to create an online search and advertising group that can rival market leader Google.

The deal, which the board of Yahoo was considering last night, would bring together one of the internet's largest and oldest destinations, Yahoo, with Microsoft's MSN platform in the biggest internet merger since AOL bought Time Warner for $112bn in 2000.

As well as Microsoft's software business, centred around its Windows operating system, the merged group would span online services from internet search and news to email and instant messaging. Yahoo also owns the popular photo sharing site Flickr and social bookmarking service del.icio.us.

Microsoft's chief executive, Steve Ballmer, telephoned his counterpart at Yahoo, co-founder Jerry Yang, late on Thursday night before going public by publishing his letter to the board yesterday. "When you combine the strengths of our two companies the result will be an incredibly efficient and competitive offering for consumers, for advertisers and for publishers," he said.

The global online advertising market is expected to balloon from $40bn last year to $80bn by the end of the decade. But Google has a commanding lead in the largest segment of that market, online search. In the UK, for instance, Google accounts for 81% of all online searches compared with 6% for second placed Yahoo and 5% for MSN, according to the online data group Comscore.

"Today the market is increasingly dominated by one player," said Kevin Johnson, president of the platforms and services division of Microsoft. "The fact is the industry will be better served by having a more credible alternative."

European internet executives agree that Google needs a serious competitor. "A Yahoo acquisition by Microsoft will improve competition in the European search market, which is overwhelmingly dominated by Google," said Andrew Walmsley, co-founder of the London-based digital media agency i-level.

But Google has recently been widening its business to include other forms of online advertising. Microsoft hopes adding Yahoo's expertise will give it more weight with advertisers.

Yahoo, however, has had a disastrous two years. Having been one of the pioneers of the internet, delays to the launch of its new advertising platform - called Panama - sparked a series of profit warnings. Earlier this week Yang unveiled plans to axe 7% of the company's workforce after unveiling a 24% drop in fourth quarter profits to $205m. Yahoo's shares have performed badly, dropping from just over $34 in October to a four-year low of $18 on Tuesday. Microsoft is offering Yahoo shareholders $31 a share in a combination of cash and its own stock.

Speculation was rife on Wall Street last night that Google could hit back with a bid for another of the internet's oldest properties, AOL, in which it already has a 5% stake.

The merger of AOL with Time Warner in 2000 marked the height of the dotcom boom and created a $350bn company, but the tech stock crash and the rise of Google have left the merged business worth $56bn. Some on Wall Street fear that an amalgamation of Microsoft and Yahoo could meet a similarly disastrous fate.